Fortum to sell Finnish power distribution grid for $3.5 billion

HELSINKI (Reuters) - State-controlled Finnish utility Fortum has agreed to sell its local power distribution grid to a group of institutional investors led by First State Investments and Borealis Infrastructure for 2.55 billion euros ($3.5 billion).

Fortum's president and CEO Tapio Kuula, addresses a news conference at the headquarters of the company in Espoo December 12, 2013. REUTERS/Antti Aimo-Koivisto/Lehtikuva

While the higher than expected offer from the consortium excited investors, some Finnish politicians expressed opposition, saying that foreign ownership would lead to higher utility bills for consumers.

The deal is the latest in a series of regulated grid sales made by large energy firms wanting to cut debt and focus on their power generation businesses instead.

At the same time, it highlights the increasing popularity of established infrastructure assets for pension funds and other institutional investors seeking relatively safe and assured returns in a low interest rate world.

Shares in the company were up 3.6 percent at 17.44 euros by 1447 GMT as the deal raised hopes of similarly high valuations for Fortum’s Swedish and Norwegian distribution networks which it is also looking to sell.

“It looks like the deal price is around 10-15 percent higher than what was expected,” said Jari Honko, an Alandsbanken portfolio manager who said Fortum was one of his fund’s biggest investments.

The deal values the Finnish network at around 16.6 times earnings before interest, taxes, depreciation and amortisation (EBITDA), well above multiples of around 10 in previous deals in the sector.

Markku Jarvinen, analyst at Finnish brokerage Evli, said that applying the same valuation would make all of Fortum’s grids worth a total of around 9 billion euros.

“In any case, the indication is that we will end up with a much higher total valuation than expected,” he said.

Fortum launched the sale of the grid in September and Reuters reported on Wednesday that the company was in exclusive talks with the consortium.

The Finnish grid, which covers about 20 percent of the country’s local electricity distribution, booked 325 million euros of sales and 154 million in EBITDA over the last 12 months.

First State, an asset management business owned by Commonwealth Bank of Australia, and Borealis Infrastructure, owned by Canadian pension fund OMERS, both have a 40 percent stake in the consortium.

POLITICAL BACKLASH

The consortium also includes Finnish pension funds Keva with a 12.5 percent stake and LocalTapiola Pension with 7.5 percent. Markets had widely expected their participation to appease political opposition to the sale of utilities to foreign investors.

Workers’ unions said foreign ownership could put the reliability of the grid at risk and mean higher prices.

“This sale was a serious mistake and it could prove costly for Finland,” said Antti Rinne, the chairman of white-collar union Ammattiliitto Pro.

The opposition Centre party, which has been leading recent opinion polls, also said the consortium should have been entirely Finnish.

State-ownership has become a sensitive issue in Finland, with opposition politicians and unions criticizing the government for not doing enough to save jobs while a broad range of companies have slashed jobs in response to weak European demand.

Pekka Haavisto, state ownership minister, said regulators would keep prices in check. He also said a condition of the deal was that jobs were protected.

“There will be no sacking of people,” he told Reuters.

INVESTMENTS

Fortum said it would book a gain of up to 1.9 billion euros on the deal, which is expected to close in the first quarter next eyar, corresponding to around two euros per share.

Chief Executive Tapio Kuula said its sale of the Swedish grid could take place in the latter half of 2014, while the smaller Norwegian business might be sold sooner.

He also said proceeds from the sale of the Finnish grid would be used to lower debt and invest elsewhere.

Kuula also did not rule out a future increase in dividends. Some analysts have said the Finnish government, looking to boost its budget, may be counting on a higher dividend from Fortum after the grid sales. ($1=0.7251 euros)